IQE PLC - Semiconductor Wafer Pioneer

IQE is a leading global supplier of advanced semiconductor wafers that are used in various applications ranging from mobile communications to industrial power. The company boasts a diversified global customer base and a unique IP portfolio with over 150 patents that enables the firm to provide a unique service to its customers. Headquartered in Cardiff, Wales, IQE shares were often misunderstood or underappreciated by investors in the past. However, as the company continued to deliver healthy growth winning volume contracts for new technologies (e.g. VCSEL), the share price nearly tripled in 2017 and the company successfully placed new shares raising £95m in November. Recent reports published by funds with short positions questioning IQE’s accounting with regard to profit and cash flow contribution from its joint ventures sent the stock price down by 45% from its November high. That said, the company rejected the allegation with the statement saying that the information in the short sellers report is “either factually inaccurate or has previously been disclosed in IQE’s annual reports and financial statements”. The company also appointed KPMG as a new auditor replacing PwC as of 12th February saying “the company holds itself to the highest standards of transparency, governance and integrity”. We find the management responses were timely and expect the share price to be stabilised going forward.

While IQE does not compete in commoditised semiconductor market, greater than expected price cuts can lead to margin erosion. Historical price drops for the past 10 years averages at c.5% and the company has successfully protected profitability by improving efficiency and sales mix. We find the key risk lies in end market development. Given the company’s long-term R&D commitment to new technologies, forecasting new application market development and end demand is beneficial but an extremely difficult task. Longer than expected market development or slower demand could hinder the growth of IQE. As for foreign currency, the company is largely exposed to USD transaction. However, the net impact from currency move appears limited as they are naturally hedged.

The nanomaterials market is transitioning from a concept technology to commercial applications. Haydale (LON:HAYD) specialises in the integration of nanomaterials into commercial and industrial technologies. We argue that this is a good position to occupy within the value chain – exposed to end market growth but not exposed (negatively) to the likely future price compression in raw graphene or other nanomaterials.

Major applications for Haydale (LON:HAYD) include composite materials, specialty inks and coatings, and additive manufacturing (3D printing). The nanomaterials are graphene and silicon carbide, and potential others in future. We argue that these applications have now reached a tipping point from research to commercial reality (see pie charts p2).

In the trading update of July 19th, Haydale (LON:HAYD) announced that FY June 2017 total income (revenue and other) has doubled, meaning about £3.9m for the year. Based on the order backlog, and major projects under way, we expect further strong growth in the next few years. We consider two of the specific channels for further growth.

In November 2016 Haydale announced a Joint Development Agreement with Huntsman Corporation to develop graphene enhanced resins. Adding small amounts of graphene in the resin layers of materials like carbon fibre can dramatically improve (x10) the dissipation of electrical charge (aerospace applications) and heat (aeros and autos). The deal with Huntsman potentially dramatically accelerates Haydale’s penetration of this market.

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IQE plc is engaged in the manufacture of advanced semiconductor materials. The Company is a supplier of advanced semiconductor wafer products in three market segments: wireless, optoelectronics, and electronics. The products that rely on IQE’s products include...

IQE plc is engaged in the manufacture of advanced semiconductor materials. The Company is a supplier of advanced semiconductor wafer products in three market segments: wireless, optoelectronics, and electronics. The products that rely on IQE’s products include all forms of wireless and satellite communication systems, comprising mobile phone handsets and base stations, personal digital assistants (PDAs), global positioning systems and a range of wireless components for wireless fidilety (Wifi), WiMAX, laptops, and voice and data networks. IQE produces advanced materials for a range of Optoelectronic applications, which include lighting, displays, compact disk (CD), digital versatile disk (DVD), high definition (HD) DVD and data storage, as well as office, industrial and automotive products and solar cells. The Company also manufactures high-end substrate materials, which are primarily used for advanced optoelectronic applications, such as infra red detectors and thermal imaging device